Internet banking software and service vendors: change agents

Computer Industry Report,  Jan 22, 1999  

• E-mail
• Print
• Link

As banks prepare to enter the 21st century, they are responding to consumer demand to use the Internet as the medium to conduct personal finance transactions.

The nascent market for service providers and vendors of online banking applications will start to explode in 1999. The combined revenues of Internet banking applications and services will grow at a compound annual growth rate of 272% between 1998 and 2000, from $193.8 million to $2.67 billion.

The Internet banking services market will rapidly eclipse the Internet banking applications market in revenues. Starting from a 50-50 split in combined revenues in 1998, by the year 2000, services will own a 75% share of the U.S. revenues at $2 billion. A portion of these revenues will be from transaction-based fees.

Many banks are responding to the demand by building sophisticated Web sites with interactive features. For example, Wells Fargo, one of the first major banks to invest in the Internet, recently told Wall Street that its online customer base grew to 650,000 in December 1998 from 20,000 in 1994. However, only a small number of banks have full transactional capabilities on their Web sites.

The rapid growth in banks' adoption of the Internet in 1998-2000 is in contrast to 1997, when Web-based systems spending at banks was relatively low. According to IDC's most recent Global IT Survey, banks spent 4.1% of their IS operating budget on Web-based systems in 1997 - while insurance companies spent 8.3% of their budgets on such systems.

There are signs that banks are paying closer attention to the Internet as an important channel through which to deliver services. Last year saw the rapid expansion of the online banking applications and service markets, which barely existed a year earlier.

Some of the key trends within the banking arena include the following:

* Applications sales will soar. U.S. sales of Internet banking applications reached $96.5 million in 1998, up from less than $20 million in 1997. In 1999, the market is expected to grow 250% to $337.8 million due to widening acceptance of the Internet and tremendous changes in the financial services industry that will leave banks, insurers, and brokerages competing for customers in a free-for-all environment.

* Service revenues will grow faster. As many banks turn over the development and hosting of their Web sites to outside firms, the revenues for these service providers are expected to grow 592% to $674 million in 1999 [ILLUSTRATION FOR FIGURE 1 OMITTED]. Service revenues will continue to outpace license sales as bank Web sites attract new users.

* Internet banking will play a critical role. While the U.S. banking applications market is growing at a tepid 9.5% annually, Internet banking software sales will be outstripping that number and will account for nearly one-third of the total banking/finance application revenues by 2000 [ILLUSTRATION FOR FIGURE 2 OMITTED].

* Market acceptance. Banks, despite their risk-averse tradition, are beginning to embrace the Internet to deliver financial data to consumers and businesses on a real-time basis so that they can view and pay bills, transfer money between accounts using their ATM passwords, or even complete complicated cash-management tasks such as wire transfers.

* The pitch. More than two dozen vendors and service providers have started to capitalize on the online banking applications marketplace. The pitch from these vendors is simple: Turn your bank into a virtual financial center that can deliver the offerings of any physical bank as well as the ability to cross- or up-sell financial products from car loans to 401K plans.

In an era when a premium is paid for any product or service that can win customer loyalty, these online banking solutions - with prices ranging from $895 at SBS Corp. to a few million dollars at Security First - are being touted as the panacea for banks looking to simultaneously increase market shares and retain existing customers.

MARKET OPPORTUNITIES

More than 1,200 U.S. banks and credit unions signed with online banking applications vendors and providers to build fully transactional Web sites in 1998, according to IDC estimates. This year, 7,200 banks and credit unions are expected to acquire online banking applications and services, at a total cost of $1 billion. A fully transactional Web site allows bank customers to complete certain kinds of transactions over the Internet, such as bill payment, fund transfers, and stock purchases.

The return on such investments is encouraging. For example, at Digital Credit Union in Maynard, Massachusetts, more than 15,000 of its 90,000 customers now access its Web site regularly for information about their accounts. In addition, Digital Credit Union's Web site generates between 2,000 and 2,500 loan applications in a given month; these applications were processed manually in the past.

In Madrid, Spain, Bankinter recently launched its Web site and, within two weeks, had signed up 5,000 users, creating 15,000 transactions. Today, Bankinter's site has more than 60,000 users, or 10% of its customers, and generates $100 million worth of transactions every month.